Did Saudi Arabia really raise its oil production?

As we begin another week of turmoil in the Middle East, and countries further afield batten down the hatches in an effort to preclude being next, here are some of the things we don't know:

-- Whether oil prices are going up to $220 a barrel (and $5 at the pump), or down to $70 a barrel and more like $2.50 for a gallon of gasoline in the United States;

-- Whether Saudi Arabia really increased its oil production last week, or if the truth is a bit different;

-- And, finally, whether Russia's gentleman president, Dmitry Medvedev, has been rummaging through Vladimir Putin's archive of paranoid off-the-cuff remarks, and truly does not grasp what is happening around him.

It was Nomura Securities that, in the Goldman Sachs style of hype-as-part-of-corporate-promotion, last week forecast oil prices of $220 a barrel. Nomura predicated its forecast on Algeria devolving into chaos, and shutting down its 1.8 million-barrels-a-day of oil production. Since that would be on top of Libya's current cutoff of around 1 million barrels a day, the combined loss to the market would rub right up against the industry's total spare production capacity of 4 million barrels a day. Hence, prices would rise steeply because at once we would be back to 2008, with almost no margin for error for any other mishap like a hurricane, a Nigerian pipeline explosion -- or more Middle East unrest.

Yet, why the figure $220? Do we go up in fifths now? We side with the cooler-headed Dave Kansas at the Wall Street Journal, who calls Nomura's projection "fraught."

But are we headed as low as $70 a barrel either? That's what Almir Barbassa, the CFO of PetroBras, the Brazilian oil giant, told MarketWatch. For the reason he says that, read on.

When the trouble in the Magreb and the Middle East calm down -- which he thinks they will soon enough -- prices will range between $70 and $90 a barrel, Barbassa said. That actually sounds a lot more reasonable. Is Algerian production really going to go off line? Greg Priddy, an oil analyst at Eurasia Group, a risk-management firm in Washington, has his doubts. "Algeria is more likely to be Egypt-like than Libya-like," Priddy told me by phone over the weekend. "It has a more professional military." So is its oil company, Sonatrach. In other words, even if the government loses control there, the military is likely to step in, and Sonatrach can keep the fields operating.

And if we are not talking Algeria, who are we discussing? Saudi Arabia? We have raised that scenario here at O&G, but the primary risk is not one of losing Saudi production -- it's of scaring the daylights out of the market because some unrest hits the streets in Saudi's oil-rich Eastern Province. Those are very different matters.

In the final half-hour of trading last Friday, the price of oil dropped quite a lot. Why? Because of a rumor that Col. Moammar Qaddafi was dead, which made the market think the whole Libyan mess was over; and second, because Saudi Arabian officials called the Western-run International Energy Agency, and told them that they had raised their oil production to 9 million barrels a day, which would be about 4 percent higher than the 8.6 million barrels announced previously.

There is in fact good reason to think that the Saudis are producing 9 million barrels a day, but reasonable doubt that they went up to that level just last week in response to Libya. Instead, there is very much the chance that the Saudis had already been quietly producing that volume for some time before the Libyan uprising for very different reasons having to do with domestic electricity demand, and other, unrelated market factors. I know this because I called around, and the talk of a Saudi production increase has been in the market since last October.

Because the Saudis are so opaque, no one knows with certainty what's going on in their oilfields. But suffice it to say that the market may seek a bit more clarity on this question. That's because if they were producing that much then, it does not necessarily prove that they can raise their production now, neither for the many months before full Libyan production returns to the market.

Among the serious doubters are Jim Rogers, a Singapore-based investment adviser, who tells Bloomberg flatly that Saudi hasn't increased its oil production at all. He says it doesn't have the capacity to do so. Watch the video all the way through to hear Rogers on a long incline in all commodity prices.

The regional trouble has spread to other petro-states - to Oman, where Sultan Qaboos bin Said is attempting to quell unrest with economic and political concessions; and Bahrain, where King Hamad bin Isa Al Khalifa may have to make more compromises to tamp down ongoing disturbances there. Bahrain is important strategically not because it has a lot of oil, but because it is connected by a 16-mile-long causeway to Saudi Arabia's Eastern Province, and hence its trouble could wash over.

Outside the region, China unsurprisingly cracked down preemptively after on-line appeals for street protests (pictured above is a democracy commemoration in Hong Kong yesterday). But Russia's Medvedev -- the soul of reason in other cases -- seemed wholly out of character with his own response to the Middle East: The Arab uprisings were instigated by foreigners who also are intent on ousting him, he said, according to a piece by Nabi Abdullayev in the Moscow Times. "Let's face the truth," Medvedev told security officials in the city of Vladikavkaz. "They have been preparing such a scenario for us, and now they will try even harder to implement it. In any case, this scenario will not work."

Of course it is not just the residents of the Kremlin who can misjudge current affairs. Consider the British historian Niall Ferguson, who in a piece in Newsweek suggests that the United States inject itself fully into the Middle East unrest. Egypt and Tunisia succeeded profoundly precisely because the West had zero apparent involvement (although now Washington and Western institutions can and should step in with serious money to support the broad-based, secular-majority populations that brought about the local political shakeups.) In backing up his policy guidance, Ferguson, like many Western diplomats, is under a seriously egotistical misconception that the West brought down Communism. Instead, as with the dictatorships in the Middle East today, Communism, and the people who lived under it, brought down Communism.

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